Thursday, January 05, 2012

What is your quality metric?

Imagine you're a political leader faced with the the decision of whether or not to institute a particular economic policy. You are told by your advisors, who are honorable, trustworthy, and 100% accurate economists, that instituting this policy will increase the real average income in your country by 25%. Would you do it? Of course you would. It's a no-brainer, isn't it?

Well, no, not necessarily. There are a lot of different ways to raise the average 25%. One is to raise everyone's income by 25%. But another way is to double the income of half the population while halving that of the rest. A third (to take this to an extreme) is to make the income of a single individual be the former GDP plus 25% while utterly impoverishing everyone else.

I hope I don't have to convince you that the third outcome is not a very good one. Even if you happen to be the one lucky person who becomes the trillionaire your quality of life is not likely to be very high, since you will now be living in a country where everyone but you is starving and living on the street. So maybe you'll decide to spread the wealth by hiring a few people to help out with the gardening. Or maybe you'll just hop in your private jet and go somewhere else (maybe somewhere they have gated communities).

But what about the second outcome, the one where half the people get their incomes doubled while the rest are halved? That again is not so clear, and whether you consider this a good outcome or not probably depends on how and why the income redistribution happens. For example, if it happens as the result of a shift from a controlled economy to a market economy, and the people whose incomes are doubled are the ones who are motivated by profit to become more productive while the ones whose incomes are halved are the ones who resist market forces and spend their days protesting the demise of the welfare state then you might be inclined to think it's a good thing. But if it's the result of half the people banding together and somehow coercing the other half into working harder for less pay then one might be a little less enthusiastic.

The point here is not that one economic policy is better than another, but that merely deciding whether one outcome is better than another is already a non-trivial exercise. But it is nonetheless a crucial exercise, because the chances that you will get what you want without first deciding what it is are very low. Even on an individual level figuring out what you want is not so easy. Do you want the big house with room for all your toys, or the little house that's easier to maintain? Or would you rather be unburdened by such choices so you can take the time it would require to make such decisions to sit under a tree and read a book?

Adherents of free-market economics like to think that they can solve this problem by letting everyone make their own decisions. And empirically, the outcomes of free market economics do seem to dominate all competitors, at least if you care at all about material well being. But there are two problems. One, as I have just noted, is that people often do not actually know what they want. And the second is that there is no such thing as a free market. Every market is regulated by something, even if that something is only the social norms and conventions of the merchants and their customers.

Of course, in the real world, markets are usually regulated by governments which make rules about, for example, what is and is not property. Once upon a time in the United States, humans could be legal property. Nowadays we have this concept of intellectual property, which is often misunderstood to be some kind of consequence of natural law, but is in fact a wholly artificial construct designed to reward people for creating (and hence encourage them to create more) artistic and inventive works. Intellectual property exists because we as a society decided that it should exist, not because it's a consequence of the laws of physics.

So here is a not-entirely-implausible scenario of something that could actually happen in today's world: somehow a highly contagious and deadly pathogen is released into the world. If you get it, you're probably dead. Someone invents a cure, but unlike Jonas Salk this person takes out a patent, and decides to price the medicine at what the market will bear: 99% of your net worth, and a lien on all your future earnings. After all, the alternative is death. What's your life worth? What is your child's life worth?

Or take this scenario: suppose someone invents and patents a genetically engineered food crop while at the same time releasing chemicals into the environment that kill all non-genetically-engineered alternatives. The inventor of such a plant could become fabulously wealthy. But is this a good outcome?